Federal budget deficit less than feared, says RBC

A new report from one of Canada's largest banks says the federal government's balance sheet is in better shape than previously projected.

A Royal Bank analysis says that Ottawa's deficit for the current fiscal year could come in as low as $20 billion, well below the $31 billion calculated by Ottawa in November.

The good news for the government comes just days before Finance Minister Jim Flaherty delivers the latest federal budget.

The projection is based on the three-quarters worth of the year's financial data. It shows government revenues coming in above expectations, while expenses have been well below.

If the pattern holds true, it could put Flaherty ahead of schedule for eliminating the deficit in 2016-17. RBC chief economist Craig Wright says it could shave off as much as two years from Flaherty's most recent projections.

When the minister met economists earlier this month, they advised him that the risks to the global recovery had diminished, mostly because Europe was dealing with its debt crisis and U.S. growth had resumed.

Since then, they have told Flaherty to plan for the economy to grow by 2.1 per cent this year and 2.4 per cent next year.

While risks remain, Wright says they have diminished. It's unlikely Flaherty will need to use the $3.5 billion he put on reserve during this fiscal year, he says.